When the U.S. Federal Reserve panicked for a second time and cut interest rates to 0%, pressure on profit margins for financial services firms worsened. Toronto-Dominion Bank (TSX:TD), Bank of America (NYSE:BAC), Citigroup (NYSE:C), and JPMorgan Chase (NYSE:JPM) are just a few top companies falling by ~20% on average in the last week.
The rapid discount in a short amount of time does not justify buying these stocks just yet. Chances are very high that the growing bankruptcy risks from customers and mortgage holders loom. Some firms will delay mortgage payment dues for six months but banks have more headaches ahead.
The breakdown in oil prices will weigh on their debt. Banks will need to either restructure the loan to help slow bankruptcy risks or take a write-down in the next quarter. Despite the troubles ahead, Wells Fargo (NYSE:WFC) is bucking the trend. It seeks to remove its asset cap, according to a Financial Times report.
This will free up assets, which is currently capped at $1.95 trillion. The firm had $1.927 trillion on its balance sheet. And because the firm is paying fines on the credit card scandal, the cap is no longer necessary. This will help the Fed achieve greater market liquidity.
So, as the market risks increase, financial services firms are not yet in deep value territory. Investors should limit investing in this segment for now.
